Privatised electricity businesses would better achieve necessary efficiencies

It’s been clear for some time that the Australian Energy Regulator (AER) would make large cuts to future allowable revenues for Energex and Ergon, and that this would potentially impact Queensland Government dividend income. The preliminary determinations from the AER were released last week and they were as brutal for the businesses as expected, and Ergon in particular is facing some tricky questions about how it will cut its costs (see Ergon Energy has “no plans” to cut staff after nation’s energy regulator cuts revenue by 30 per cent).

With Ergon (and Energex) remaining in public ownership, it will be difficult to make the large job cuts required to achieve the necessary efficiencies, given that political considerations will inevitably intrude. Ergon appears heavily over-staffed, and the Government itself is being questioned about possible job losses that might result from the proposed Energex-Ergon merger (see Opposition calls to end power jobs uncertainty). With political considerations at play, it’s likely over-staffing won’t be reduced enough, and this will have significant budgetary implications, being reflected in lower dividend payments to Government.

Related previous posts include:

Risk to Qld Budget of lower dividends from Govt-owned businesses

Productivity Commission says no rationale for State ownership of Energex and Ergon

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5 Responses to Privatised electricity businesses would better achieve necessary efficiencies

  1. Paul Casbolt says:

    As advised by the AER (Energex: http://www.aer.gov.au/node/20187) their preliminary decision is to accept Energex’s forecast operating expenditure (opex) and most of its proposed forecast capital expenditure (capex). The component with the greatest impact on total revenue is the allowed rate of return. The AER didn’t accept Energex’s proposal for a “guaranteed” rate of return of 7.75% as the investment environment has improved and translates to lower financing costs. The preliminary decision sets the allowed rate of return (or ‘cost of capital’) at 5.85% for 2015−16.
    For Ergon, the AER decision (Ergon: http://www.aer.gov.au/node/20186) proposes a 10.5% reduction in operating expenditure based on benchmarking and review of historical expenditure which showed “costs are above what a prudent and efficient operator would incur in delivering services to Ergon’s customers.” Hopefully these AER decisions are accepted and assist to contain further electricity price increases, primarily driven by overbuilding “poles & wires”. There is also a need for innovation that exploits the benefits of new technology, including distributed generation such as Solar PV. Profit margins are very high for both these monopoly Govt Corporations and high dividend payments to the State Govt. are likely to remain.

  2. The Happy Hillbilly says:

    Nothing to add currently to the argument but just noticed the oppositions hand-wringing over the threat to jobs at government owned corporations – this was the mob that proceeded to cut government employee throats left, right and centre within a short time of being elected a few years ago, now showing “genuine” concern for the plight of such workers under the new government – priceless!!!

    Ahhh…….politics.

  3. Jim says:

    Gene

    I think the benefits of privatisation via labour savings may be negligible at best because of the cost structure of the sector (dominated by capital, not labour costs).

    But I think there is another emerging reason to consider privatisation for the energy assets emerging – technological obsolescence. The generation costs from solar are rapidly declining, as are the costs of small-scale storage (e.g. Tesla power wall). In the next 10 years how, many small-scale consumers will opt to go off grid? How many new developments will make the same decision? I know of at least one developer who is doing the numbers for an off-grid residential development in SEQ already.

    In short, technological advancements are making medium and longer term energy demand forecasts that underpin revenue and asset values across the energy sector very uncertain. Current assumptions underpinning demand are questionable at best, and reckless financial management at worst. Remember that in an industry highly dominated by fixed costs, even small declines in sales can have massive implications for profitability and asset values.

    If you were the Government would you really want to own a business and long-life assets with risks of severe underutilisation and potential obsolescence? Is the Queensland Government better off securing a discounted sales price for the assets now, rather than a fire sale price in the future?

    • Gene Tunny says:

      Yes, very good point about potential obsolescence. It might have helped the previous Govt politically in the public debate on privatisation if it had made this point. Of course that would have depressed the sale/lease price so they couldn’t make the argument I suppose. Thanks Jim.

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